Method and system for matching short trading positions with long trading positions

ABSTRACT

A system and method for automatically matching short and long positions of participants and automatically generating repurchase agreements (“repo”) and reverse repurchase agreements (“reverse repo”). The system and method provide trading anonymity and various filtering options for the members.

CROSS-REFERENCE TO RELATED APPLICATION(S)

This application is a continuation of U.S. patent application Ser. No.13/561,803, filed Jul. 30, 2012, entitled “Method And System ForMatching Short Trading Positions With Long Trading Positions,” nowallowed, which is a continuation of U.S. patent application Ser. No.10/032,653, filed Nov. 13, 2001, entitled “Method And System ForMatching Short Trading Positions With Long Trading Positions,” now U.S.Pat. No. 8,234,204, which claims priority to U.S. Provisional PatentApplication No. 60/248,133, filed Nov. 13, 2000, entitled “Method AndSystem For Providing An Efficient, Cost Effective Centralized MechanismBy Which A Dealer Looking To Cover Short Positions Will Find FavorableRate,” all of which are incorporated herein by reference in theirentirety.

BACKGROUND

Presently, a securities dealer seeking to cover short positions willindividually contact other clients, dealers, brokers or securitieslenders to do so. This process is generally time consuming, costly andat times inefficient. Furthermore, unless the dealer seeking to covershort positions contacts each and every broker, dealer or securitieslender, there is no way to ensure that the dealer will find the securitythey need to cover a short position.

What is desired, therefore, is a method and system that will provide anefficient, cost effective centralized mechanism by which a dealerseeking to cover short positions will find available long positions at afavorable rate. These and other advantages are achieved by the inventiondescribed herein below.

SUMMARY

In one embodiment, the invention provides a method and system forautomatically identifying a counter party position that has a short orlong position. The method comprises receiving at a first terminal atleast two short positions. Also, receiving at the first terminal atleast two long positions. Also, identifying at the first terminal aselected short position from the at least two short positions and aselected long position from the at least two long positions, theselected short position and the selected long position identified byparameters associated with the positions. Also, providing sufficientinformation from the first terminal to a second terminal and to a thirdterminal to allow a transaction between the selected short position andthe selected long position.

BRIEF DESCRIPTION OF THE DRAWINGS

The foregoing features and other aspects of the invention are explainedin the following description taken in conjunction with the accompanyingfigures wherein:

FIG. 1 illustrates an embodiment of a system that may be used with theinvention;

FIG. 2 illustrates an embodiment of steps in a method of the invention;and

FIG. 3 illustrates an embodiment of a system and method according to oneembodiment of the invention.

It is understood that the figures are not limiting and are forillustration purposes only.

DETAILED DESCRIPTION

The various embodiments of the invention described below may bepracticed by a small group of members, such as members of a group orconsortium. The embodiments may also be practiced more generally byinvestors individually or through their broker, dealer, agents, inconjunction with a smaller member group.

To better understand the various embodiments of the invention, it ishelpful to generally understand short and long positions within thecontext of securities and securities trading. A short position generallymeans that an investor has sold more of a particular asset or securitythan they own. A long position generally means that an investor ownsmore of a particular asset or security than they have sold. The asset orsecurity might be an equity security, such as a stock, or it might be adebt security, such as a bond. Conceptually with a short position, theinvestor will eventually have to get the rest of the assets they sold,but don't currently own. Alternatively, if an investor has a longposition in a particular asset or security, they may be willing to“lend” some of those securities to another investor who has a shortposition in the same security. Of course, lending generally implies someform of interest or compensation in return to the party owning thesecurities. In this way, the investor with a long position has anopportunity to earn a profit in the form of interest from their longposition, and the investor with a short position has an opportunity topay a known amount, in the form of interest, to reduce their borrowingcosts by covering their short position.

As part of the process of covering a short position with a longposition, it is common to use a repurchase agreement (“repo”). A repo isan agreement between two parties whereby one party sells a security tothe other at a specified price and stated finance rate with a commitmentto repurchase the security at a later date. The finance rate may befixed or variable. The duration of the trade may be for 1 day (called anOvernight deal), or for a specified duration (called a term deal), orfor an indeterminate time, but usually less than 1 year (which is calledan Open deal). In essence, a repo is a secured loan. The partypurchasing the security is making funds available to the seller andholds the security as a form of collateral.

“Reverse repo” is a term used to describe the other side of a repotransaction. The party selling and later repurchasing the security issaid to perform a repo. The other party—one that purchases and laterresells the security—is said to perform a reverse repo.

Referring to FIG. 1, an embodiment of a system 100 used in the inventionincludes a number of computers or terminals 102, 103, 104, 105.Computers 102, 103, 104, 105 are interconnected to another computer 106by a network 108. Computers 102, 103, 104, 105, 106 include at least oneprocessor 110, memory 112, fixed and removable storage for data and/orcode 114, 116, input/output devices 118 and network interface devices120. Interconnection network 108 is the Internet, a direct connection,wired, wireless, infrared or other type of secure or unsecure data andinformation exchange.

For purposes of the description herein, the various embodiments of themethod and system of the present invention may be referred to as“Position Billboard”. Furthermore, to carry out the concepts of PositionBillboard, there is described herein a third party or an entity “NewCo”that participates in or expedites various aspects of Position Billboard.

Generally in one embodiment, the invention is a securities shortcovering facility that allows members to cover their short positions atmore attractive financing rates than current industry alternatives. Inthis embodiment, the invention systematically obtains long and shortposition information from each participant or member, processes theinformation in accordance with any system or member-controlledparameters, matches the short positions of participants with the longpositions of other participants, and feeds the resultant activity backto each participant in the form of system-generated finance trades.NewCo acts as a third party agent, thus allowing the invention toprovide anonymity among its participants.

The various embodiments of the invention provide a number of benefits.Some of those benefits are: reduced borrowing costs to participantsthrough reduced fees; reduced margin requirements, thereby savingworking capital for the borrower; attracting collateral by enablingparticipants to further reduce their borrow costs and/or earnincremental revenue for their non-tight lending; and creating balancesheet netting opportunities by booking both trades as Repos/ReverseRepos with a counter party, such as Government Securities ClearingCorporation (“GSCC”).

GSCC is an industry service organization that serves to ensure orderlysettlement in the government securities market. It should be understoodthat while the present description of the invention refers to GSCC andthe United States securities market, this invention can be implementedfor foreign securities markets as well that employ similar netting andcounterparty risk criteria.

Other benefits of the embodiments of the invention are: increasedliquidity in the lending market by having more collateral available forlending; maintaining the anonymity of participants by providing a thirdparty agent; and creating sales force efficiencies enabling the salesforce to focus on revenue generating opportunities.

As described above, an objective of some embodiments of the invention isto provide the NewCo members with a centralized mechanism to pool theirlong inventory for the purpose of covering short positions andgenerating the appropriate finance transactions to support thosecoverings. Finance trades generated by the various matching processes ofthe invention are done on an overnight basis at an agreed upon overnightfinancing rate.

In this manner, the various embodiments of the invention provide memberswith an efficient and less expensive “market” for short term financing.Without the invention, the majority of this activity is executed throughinter-dealer brokers, dealer-to-dealer, and securities lenders. With theinvention, participants and members of the NewCo entity save fees paidand margin costs on these transactions.

In order to maintain trading anonymity and facilitate settlement ofon-side finance transactions, members of NewCo generally agree that thecounterparty to their on-side transactions will be NewCo as agent.Members of NewCo also generally agree to partake in settlements throughan Omnibus clearance account under the name of NewCo. This helps toassure that the members' and participants' long and short positions,hence their trading strategies, are kept anonymous throughout thesettlement cycle. As in the securities lending market, members do havethe right to inquire about the identity of the member on the other sideof their trades.

NewCo members also have the ability to establish certain “filters” whichhave the effect of excluding some long or short positions. These filterscan be by notional size (high, low or a range), security identifier(such as CUSIP number), security type, maturity range and otherparameters, which are apparent to one of ordinary skill in the art.“CUSIP” stands for Committee on Uniform Securities IdentificationProcedures, and this committee supplies a unique nine-characteridentification, called the CUSIP number, for each security approved fortrading in the U.S., to facilitate clearing and settlement. The filterscan also be modified intra-day and any subsequent position refresheswould be applied to the revised filters. In one embodiment of theinvention, the maintenance of filtering parameters is the responsibilityof each member, thus insuring that only desired positions aredownloaded.

Once the filters have been established, each member downloads their longand short positions, as well as their term repo and reverse repotransactions. Based upon members' parameters and agreed upon processingrules, the invention first attempts to cover a participant or member'sshort positions by substituting collateral that is out on term and openrepo (with other members). NewCo keeps track of original start of daypositions it has received from its members, as well as positions thatresult from the substitution transactions.

After all substitutions have occurred, the process matches the remainingshort positions with the long positions of other members and generatesthe appropriate repo/reverse transactions. An overnight repo transactionis generated for the member with the long position, and an overnightreverse repo is generated for the member with the short position, eachwith the agreed upon overnight interest rate. In the event the totallong position is greater than the total short position for a given CUSIPnumber, the lending occurs on a pro-rata basis. Similarly, when thetotal short position is greater than the total long position for a givenCUSIP number, the borrowing occurs on a pro-rata basis.

Both the substitution and borrow/loan trades feed to the respectivemember's proprietary systems for position updating and settlementprocessing. The counterpart to each trade is the NewCo entity, and eachmember delivers/receives securities to/from a NewCo Omnibus account.NewCo keeps track of original start of day positions it has receivedfrom its members, as well as positions that result from short coveringtransactions.

Members have on-line inquiry capability to view only their own filters,restrictions, substitutions, downloaded start of day positions,positions excluded from the start of day download, executed trades andcurrent positions. This information is also available in electronic formto facilitate reconciliations. Members are not able to see the data ofother participants.

In one embodiment, the matching process runs once per day. In otherembodiments, more than one batch per day is run. The invention alsoobtains vendor prices, which are used for calculating the market valueon (substitution and) borrow/loan transactions.

Referring to FIG. 2, one embodiment of the invention process flow beginsat steps 202, 204, where members or participants at terminals 2 and 3(represented in FIG. 1 by computers 102, 103, 104, 105) identify theirlong and short positions. As described above, in one embodiment, thisoccurs on a daily basis. In other embodiments, this occurs at intervalsduring the trading day.

At steps 206, 208, the members or participants each send the short andlong positions that they identified to terminal 1 (represented in FIG. 1by computer 106).

At steps 210, 212, terminal 1 receives the short and long positions fromterminals 2 and 3. The respective positions are handled by terminal 1 ina manner such that they can be individually tracked or traced to thesending participant or member.

At steps 214, 216, terminal 1 filters the positions. This filtering isdescribed generally above, and is according to the parameters that areestablished by the submitting member or participant. For example, oneparticipant may require that their positions for a particular securitybe matched only with certain other participants. Or, they may requirethat the matching be according to certain allocation percentages. Orthey may require that some percentage of their position not be matched.

At step 218, after the positions have been filtered, terminal 1 matchesshort positions with long positions. This matching occurs on a CUSIPbasis until all positions that can be matched have been matched.

At step 220, terminal 3 considers any filters that have been establishedand allocates the long positions for each CUSIP to the short positionsfor that CUSIP. As discussed above, if there are more long positionsthan short positions, the lending is on a pro-rata basis. Alternatively,if there are more short positions than long positions, the borrowing ison a pro-rata basis.

Once the long and short positions have been matched and any allocationcompleted, then at steps 222, 224, terminal 3 creates the appropriatefinance trades and informs terminals 1 and 2 of the trades.

Finally, at steps 226, 228, terminals 2 and 3 receive the position matchinformation.

As illustrated in FIG. 2, filtering is performed by terminal 1. However,it is possible that terminals 2 and 3 perform some or all of thefiltering before the positions are sent to terminal 1.

As illustrated in FIG. 3, the various elements of system 100 of theinvention generally use an open-ended architecture to facilitate andexpedite the exchange of information with its clients. Features providedinclude standardized message formats, instantaneous restart andrecovery, real-time connectivity to clients and a global web-orientednetwork. In one embodiment, the invention operates within pre-scheduledprocessing cycles but is designed for real-time execution.

Anonymity among its clients is also a feature of some embodiments of theinvention. Each member can view only their data and cannot gain accessto other clients' data. Client access is achieved through rigoroussign-on security features such as encrypted sign-on IDs and passwords.Once a client successfully gains access to its own domain, the availablefunctions are based upon the authorization level. Various authorizationlevels within client firms are established.

Although illustrative embodiments have been described herein in detail,it should be noted and will be appreciated by those skilled in the artthat numerous variations may be made within the scope of this inventionwithout departing from the principle of this invention and withoutsacrificing its chief advantages.

Unless otherwise specifically stated, the terms and expressions havebeen used herein as terms of description and not terms of limitation.There is no intention to use the terms or expressions to exclude anyequivalents of features shown and described or portions thereof and thisinvention should be defined in accordance with the claims that follow.

1-13. (canceled)
 14. A processor implemented method comprising:receiving, at a terminal, a plurality of member short positions and aplurality of member long positions; selecting, at the terminal via aprocessor, a member short position associated with a first member andone or more counter member long positions associated with other members,wherein the counter member long positions are selected based onparameters associated with the positions; generating, at the terminalvia a processor, one or more transactions between the first member andthe one or more other members to cover the member short position, theone or more transactions including one or more of a system-facilitatedpro-rata transaction and a substitution transaction; and executing, atthe terminal via the processor, the one or more transactions between thefirst member and the one or more other members to cover the member shortposition.
 15. A method according to claim 14, wherein the pro-ratatransaction includes an overnight interest rate determined based on theparameters associated with the positions.
 16. A method according toclaim 14, wherein the pro-rata transaction includes an overnight repotransaction for the one or more other members.
 17. A method according toclaim 14, wherein the pro-rata transaction includes an overnight reverserepo for the first member.
 18. A method according to claim 14, whereinthe pro-rata transaction includes system-facilitated lending on apro-rata basis between the selected positions if total counter memberlong positions are greater than the member short position for a givenfinancial instrument and system-facilitated borrowing on a pro-ratabasis if the member short position for the given financial instrument isgreater than the total counter member long positions.
 19. A methodaccording to claim 14, wherein the substitution transaction indicatessubstituting first collateral of the first member with other collateralof other members.
 20. A method according to claim 19, wherein the firstcollateral is out on term or open repo.
 21. A method according to claim14, further comprising sending the one or more executed transactions tothe first member and the one or more other members respective terminalsfor position updating and settlement processing.
 22. A method accordingto claim 14, further comprising filtering one or more of the pluralityof member short positions or the plurality of member long positionsaccording to filter parameters.
 23. A method according to claim 14,wherein the filter parameters include one or more of a percentage, amember identity, or a limit on a number of counter parties.
 24. A methodaccording to claim 14, wherein the filter parameters are specified bythe first member.
 25. A method according to claim 14, wherein selectingincludes matching the Committee on Uniform Security IdentificationProcedures (CUSIP) information associated with at least one member shortposition of the plurality of member short positions with the CUSIPinformation associated with at least one member long position of theplurality of member long positions.
 26. A method according to claim 14,wherein the plurality of member short positions include short positionsin at least two different securities.
 27. A computer readable mediumhaving computer executable instructions stored thereon, theinstructions, when executed by a processor, cause the processor to:select a member short position associated with a first member from aplurality of member short positions and one or more counter member longpositions associated with other members from a plurality of member longpositions, wherein the counter member long positions are selected basedon parameters associated with the positions; generate one or moretransactions between the first member and the one or more other membersto cover the member short position, the one or more transactionsincluding one or more of a system-facilitated pro-rata transaction and asubstitution transaction; and execute the one or more transactionsbetween the first member and the one or more other members to cover themember short position.
 28. A computer readable medium having computerexecutable instructions stored thereon, the instructions comprising:instructions to select a member short position associated with a firstmember from a plurality of member short positions and one or morecounter member long positions associated with other members from aplurality of member long positions, wherein the counter member longpositions are selected based on parameters associated with thepositions; instructions to generate one or more transactions between thefirst member and the one or more other members to cover the member shortposition, the one or more transactions including one or more of asystem-facilitated pro-rata transaction and a substitution transaction;and instructions to execute the one or more transactions between thefirst member and the one or more other members to cover the member shortposition.
 29. A system comprising: a processing unit; an interfaceconfigured to receive a plurality of member short positions and aplurality of member long positions; a memory unit having computerexecutable instructions stored thereon, wherein the instructions, whenexecuted by the processing unit, cause the processing unit to select amember short position associated with a first member from a plurality ofmember short positions and one or more counter member long positionsassociated with other members from a plurality of member long positions,wherein the counter member long positions are selected based onparameters associated with the positions, generate one or moretransactions between the first member and the one or more other membersto cover the member short position, the one or more transactionsincluding one or more of a system-facilitated pro-rata transaction and asubstitution transaction, and execute the one or more transactionsbetween the first member and the one or more other members to cover themember short position.
 30. The system according to claim 29, wherein thepro-rata transaction includes system-facilitated lending on a pro-ratabasis between the selected positions if total counter member longpositions are greater than the member short position for a givenfinancial instrument and system-facilitated borrowing on a pro-ratabasis if the member short position for the given financial instrument isgreater than the total counter member long positions.
 31. The systemaccording to claim 29, wherein selecting includes matching the Committeeon Uniform Security Identification Procedures (CUSIP) informationassociated with at least one member short position of the plurality ofmember short positions with the CUSIP information associated with atleast one member long position of the plurality of member longpositions.
 32. The system according to claim 29, wherein thesubstitution transaction indicates substituting first collateral of thefirst member with other collateral of other members, and the firstcollateral is out on term or open repo.
 33. A processor implementedmethod comprising: receiving, at a first terminal, a plurality of membershort positions and a plurality of member long positions eachrepresenting a financial instrument identifiable by the Committee onUniform Security Identification Procedures (CUSIP); filtering one ormore of the plurality of member short positions and the plurality ofmember long positions according to filter parameters; selecting, at thefirst terminal via a processor, a member short position associated witha first member and one or more counter member long positions associatedwith other members, wherein the counter member long positions areselected based on parameters associated with the positions and comparingand matching the CUSIP of the respective member short position and oneor more counter member long positions; generating, at the first terminalvia a processor, one or more transactions between the first member andthe one or more other members to cover the member short position, theone or more transactions including a system-facilitated pro-ratatransaction and a substitution transaction; and executing, at the firstterminal via the processor, the one or more transactions between thefirst member and the one or more other members to cover the member shortposition.